HSBC Holdings plc 2003 Interim Results

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4 August 2003

• Operating income up 41 per cent to US$18,507 million (US$13,103 million in the first half of 2002).

On a cash basis (excluding goodwill amortisation):

• Operating profit before provisions up 51 per cent to US$9,017 million (US$5,957 million in the first half of 2002).
• Pre-tax profit up 26 per cent to US$6,879 million (US$5,458 million in the first half of 2002).
• Attributable profit up 32 per cent to US$4,873 million (US$3,681 million in the first half of 2002).
• Return on average invested capital of 14.0 per cent (13.8 per cent in the first half of 2002).
• Cash earnings per share up 20 per cent to US$0.48 (US$0.40 in the first half of 2002).

On a reported basis (after goodwill amortisation):

• Operating profit before provisions up 51 per cent to US$8,385 million (US$5,561 million in the first half of 2002).
• Pre-tax profit up 21 per cent to US$6,112 million (US$5,057 million in the first half of 2002).
• Attributable profit up 25 per cent to US$4,106 million (US$3,280 million in the first half of 2002).
• Return on average shareholders’ funds of 13.3 per cent (13.7 per cent in the first half of 2002).
• Basic earnings per share up 17 per cent to US$0.41 (US$0.35 in the first half of 2002).

Dividend and capital positions:

• First interim dividend of US$0.24 per share; an increase of 17 per cent over the 2002 first interim dividend.
• Tier 1 capital ratio of 8.5 per cent; total capital ratio of 11.7 per cent.

HSBC made a profit on ordinary activities before tax of US$6,112 million, up US$1,055 million, or 21 per cent, over the same period in 2002. On the same basis, profit attributable to shareholders was US$4,106 million, an increase of 25 per cent. On a cash basis, profit before tax increased by US$1,421 million, or 26 per cent, to US$6,879 million in the first half of 2003. Household and GFBital contributed US$651 million and US$272 million respectively to cash basis profit before tax. Excluding these acquisitions, and at constant currency, cash basis profit before tax increased by US$255 million, or 4.5 per cent.

Net interest income of US$11,221 million was US$3,628 million, or 48 per cent, higher than the same period in 2002, mainly due to the contributions from Household and GFBital.

Other operating income rose US$1,776 million, or 32 per cent, to US$7,286 million over the same period in 2002. In addition to the contributions from recent acquisitions, the increase primarily reflected strong growth in wealth management sales in Asia as well as a strong performance within HSBC Global Markets.

Operating expenses (excluding goodwill amortisation) of US$9,490 million were US$2,344 million, or 33 per cent, higher than in the first half of 2002. Excluding acquisitions and expressed in constant currency, operating expenses were just over 2 per cent higher.

HSBC’s cost:income ratio (excluding goodwill amortisation) was 51.3 per cent in the first half of 2003 compared with 54.5 per cent for the same period in 2002.

Since becoming a member of the HSBC Group, Household has expensed US$1,539 million in respect of bad and doubtful debts. This accounted for substantially all of the increase of US$1,659 million in the charge for bad and doubtful debts, which rose to US$2,374 million compared with US$715 million in the first half of 2002.

The US$124 million share of operating losses in joint ventures reflected a provision for the impairment of goodwill allocated to a UK fund management company acquired in 2000 as part of the CCF acquisition.

Gains on disposal of investments of US$264 million included disposal gains of US$121 million on the sale of investment debt securities.

The tier 1 capital and total capital ratio for the Group remained strong at 8.5 per cent and 11.7 per cent respectively, at 30 June 2003.

The Group’s total assets at 30 June 2003 were US$983 billion, an increase of US$224 billion, or 30 per cent, since 31 December 2002.

* Formerly described as Latin America, which included Group entities in Panama and Mexico
which are now included in North America. Figures for the first half of 2002 have been restated
to reflect this change.

**The figures for 2002 have been restated to reflect the effect of the transfer of interest rate risk
from the business units to CIBM following the implementation of a revised funds transfer
pricing mechanism in North America.

Comment by Sir John Bond, Group Chairman

HSBC’s performance in the first half of 2003 demonstrated remarkable resilience given that the majority of our business is conducted in countries either in recession or experiencing slower growth. On a reported basis, we generated a profit attributable to shareholders of US$4.1 billion, some US$826 million and 25 per cent higher than the first half of 2002. Earnings per share rose by US 6 cents, an increase of 17 per cent. The Board has declared a first interim dividend of US 24 cents, an increase of 17 per cent over the amount paid at this stage in 2002. This dividend will be paid on 7 October 2003. The Board has also announced its intention to pay a second interim dividend of US 12 cents, the first of the quarterly dividends HSBC will in future be paying. It is planned for this second interim dividend to be paid on 20 January 2004.

The results for the first half were achieved against a background of uneven economic activity in most of the world’s major economies. There was uncertainty about the pace and timing of the recovery in the US. The war in Iraq further dampened business confidence. The outbreak of SARS affected certain industries, particularly in Asia.

A key feature of our performance was the positive contribution from the new members of HSBC, Household International in the US and GFBital in Mexico. Driven in part by their contributions, as well as by impressive results from our Global Markets business, revenues rose by US$5.4 billion in the period. Operating profit before provisions and the amortisation of goodwill rose by over US$3.1 billion. Excluding the effect of these acquisitions and at constant exchange rates, we grew revenues by US$0.5 billion, or 4 per cent, against cost growth of US$0.24 billion, or 3 per cent.

The improving balance of our earnings and asset mix, both by geographical region and by line of business, reflects the impact of the acquisitions we have made. 28 per cent of our assets are now located in Asia Pacific, 42 per cent in Europe and 30 per cent in the Americas. Our investment in systems, in new products, and in a relentless focus on serving almost 100 million customers around the world is yielding results. We were delighted to be included, for the first time and amongst the top 50, in a ranking of the world’s 100 most valuable brands prepared by Interbrand. We made further progress in all lines of business.

Personal Financial Services

• The first half of 2003 was marked by low and declining interest rates. These encouraged further growth in consumer credit and prompted unprecedented levels of mortgage refinancing in the UK and US. HSBC gained both market share and significantly increased fee income. In the UK, our mortgage products remained highly rated, receiving the ‘Best National Bank’ award over two, five, and 10 years from What Mortgage magazine. Drawing on our multicultural experience, we have recently become the first UK bank to launch an Islamic mortgage in the UK. This followed the successful launch of a similar product in New York last year.
• First Direct’s Offset product accounted for more than 25 per cent of HSBC’s mortgage growth in the UK.
• Volatile equity markets discouraged retail investors but structured investment products remained popular, particularly in Asia. Sales of ‘capital protected’ investment funds in the region grew to US$3.5 billion in the period, an increase of 25 per cent. As many investors continued to prefer liquidity and security over uncertain growth opportunities, deposits grew by the equivalent of US$3.5 billion or 3 per cent.
• We have made significant investments in giving customers a choice of delivery channels, and in customer relationship management systems for the staff who serve them. Such investments are bringing results. In the three years since we launched personal internet banking, we have achieved 10.9 million registered users, including 5.8 million added through the Household acquisition.
• While the acquisition of Household approximately doubled our personal internet banking base, the number of personal customers in our other businesses registered for internet banking also rose, by 15 per cent in the first half of 2003. Sales through the internet also grew, with over 800,000 products sold in the first half of 2003. At First Direct in the UK, 23 per cent of product sales in May 2003 took place over the internet, up from 6 per cent two years ago.

Consumer Finance

• Household’s contribution in its first three months as a member of the HSBC Group was encouraging and in line with our expectations. This was despite the impact of low growth in the US economy which affected asset growth and credit quality.
• Household is committed to taking a leadership role in the consumer finance industry by establishing a benchmark for quality. As a result, Household will significantly increase its investment in compliance, monitoring and training to approximately US$150 million during 2003, which is more than double the amount invested in 2002.
• Most important, stability returned to Household’s funding base with its debt spreads falling below historical levels, reflecting its position within the HSBC Group. New benchmark issuance during the period demonstrated the increased breadth and depth of funding support available.

Commercial Banking

• Providing services to small and medium-sized enterprises around the world is a core strength of HSBC. Our business continues to grow, reflecting our success in broadening relationships with customers and our concentration on establishing service quality as our competitive advantage.
• Overall, profitability in commercial banking grew. This reflected HSBC’s leadership in attracting business start-ups, in developing fee-based services attractive to customers, and in increasing the volume of deposits gathered. Credit costs remained low. In the UK, changes resulting from the Competition Commission review cost US$52 million in the first half, in line with our expectations.
• Also in the UK, HSBC was voted ‘Best Small Business Bank’ by CIMA (the Chartered Institute of Management Accountants), received Business Moneyfacts’ 2003 award for ‘Best Computer Banking Provider’, and was ‘Best Factoring House’ according to Trade Finance magazine.
• In Hong Kong, HSBC made available additional funds and offered favourable terms to small businesses which have suffered from the economic impact of SARS. It is still too soon to predict what the longer term effects of the outbreak will be on the commercial customer base but every effort is being made to minimise it.
• We are pleased with the continued progress of our commercial banking operations in France. This has been enhanced by the acquisition of Banque Hervet which has taken full opportunity to develop with other HSBC entities a broader range of trade service products for its predominantly commercial customer base.
• Following the launch of business internet banking in Hong Kong, the US and the UK last year, we have made online business banking available in 17 more countries. By the end of June, 15 per cent - or some 300,000 of our business customers - were banking with us online.

Corporate, Investment Banking and Markets

• The overall performance of our corporate, investment banking and markets business was excellent and reinforced our position as one of the world’s top tier players in this very important sector. The results reflect our success in bringing these activities closer together and in pursuing the strategic plan we adopted in 2002. We have broadened the range of products and services we offer to our customer base, enhancing the value of the relationships we support.
• Our Global Markets division produced record results as increased customer sales combined with favourable trading conditions. Historically low interest rates and a weakening US dollar resulted in strong debt origination activity and increased sales of our widened product offerings for structured financing and hedging solutions. In debt capital market activities our rankings and market share increased in most bond issuance markets whilst for the sixth consecutive year we achieved the ‘Best at Treasury and Risk Management in Asia’ Euromoney award for excellence.
• In corporate and institutional banking, revenue growth was achieved through increased fees from refinancing activity and credit expansion. However, credit costs rose due to increased provisioning, mainly for a small number of relationships in the energy and telecommunications sectors.
• Investment banking fees grew, reflecting our strategic focus on higher margin financing and advisory business.
• Our asset management businesses performed well, attracting net inflows of US$10 billion and broadly maintaining profitability in a continuing environment of low investor appetite for equities.

Private Banking

• The results of our private banking business reflected an improved revenue mix. We achieved growth in brokerage fees and commissions, sales of structured products, trust services and safekeeping. There was also a significant increase in discretionary asset management mandates and client foreign exchange and other dealing activity.
• Restructuring of the Group’s private banking operations continued in order to improve efficiency. We began the process of combining all four of the private banks in France to create one of the largest businesses of its kind in the country.

GFBital

The integration of GFBital in Mexico (acquired in November 2002) progressed well. Consumer asset growth was strong, particularly as interest rates declined later in the half year. Co-operation with Household to develop this business is under way. GFBital is exploring avenues to channel qualifying migrants to Household as they enter the United States. Household’s home city of Chicago has the second largest Hispanic population in the US.

Household

Completion of the acquisition of Household International on 28 March marked the most significant change in the shape of HSBC in more than a decade. We were pleased to complete the transaction within the very demanding timetable established in November 2002 when it was first announced.

There are significant overlaps in profile between Household’s customer base and elements of HSBC’s and the Household business model provides access for credit to those who would not otherwise enjoy it. The two businesses are being brought together smoothly and quickly. Both teams are excited about the opportunities to deploy their respective skills and strengths across broader platforms and, in the case of Household, in a wider geographical footprint.

Synergies are now being clarified and quantified, and the evidence to date is encouraging. The most immediate synergies have come from improvements in funding costs which we now feel confident will exceed US$1 billion per annum, based on spread improvement achieved to date.

Further synergies will be achieved in card processing, IT contingency rationalisation, purchasing, call centre co-operation and the shared use of HSBC’s Group Service Centres. These, in addition to the Group-wide application of Household’s credit-scoring and data-mining technology and the consolidation of certain central administrative functions, should produce synergy benefits exceeding US$200 million per annum within two years.

In addition, there will be revenue synergies in taking the Household model overseas and establishing it alongside existing HSBC operations to tap the growing demand for consumer finance.

Credit Quality

Driven by slower economic growth and rising unemployment in the US and Hong Kong, personal credit quality showed modest deterioration in the period. The charge for bad and doubtful debts in the commercial banking sector remained moderate. In corporate banking, there was evidence of strain in the power and energy sectors and in telecommunications, as well as in the equipment suppliers to these industries. The effect of the SARS outbreak was not material in the first half.

Excluding Household, our bad and doubtful debt charge amounted to an annualised 44 basis points of our loan book, of which approximately two-thirds arose from personal lending; this was in line with last year’s experience.

During the second quarter, Household saw the level of non-performing loans rise to 3.76 per cent, tracking bankruptcy filings. Annualised charge-offs rose to 4.83 per cent of the book.

Outlook

There are mixed signals in current economic data. The significant easing of monetary policy around the world is bolstering consumer sentiment, in part through its positive effect on the housing market. Fiscal deficits are being recognised as an inevitable consequence of policies aimed at avoiding deflation. Significant debt reduction and refinancing to lower rates have been achieved on corporate balance sheets. There has been good progress in corporate restructuring, particularly in eliminating excess capacity. Sentiment is improving and there are signs in some industries that the worst may be behind us. The recent modest rise in merger and acquisition activity is consistent with this view. Prospects for the rest of 2003 are reasonable though we remain cautious about the longer term outlook because of structural imbalances in the world’s major economies.

We are positioning HSBC for modest, and uneven, economic recovery. In most developed markets, we expect revenue growth to remain subdued. We are concentrating on improving our efficiency to respond to the growing costs of new regulations and additional taxes in many jurisdictions. Strategically, therefore, we are building our business in those markets where the demographic profiles indicate growing consumer demand. We are particularly excited by the opportunities in the emerging economies of Asia, including India and China, and in the Middle East, Mexico and Brazil. Perhaps an additional and overlooked new market opportunity will be provided by the immigrant population of the United States to which, through Household, we now have access.

Overall, HSBC’s ability to generate capital remains strong. We are in an excellent position to benefit from any upturn in the world economy when it occurs and to pursue opportunities for growth that may arise. Within our industry, HSBC’s business is uniquely diversified, both geographically and by line of business. HSBC is in good shape and on course.

The full text of the news release can be downloaded using the link on the right.